Australian Dollar Price Forecast: Recalibrating
- AUD/USD builds on Monday’s sell-off, extending the drop below 0.7000.
- The US Dollar maintains its solid performance amid safe haven demand.
- The RBA’s Bullock left the door open to further tightening.
AUD/USD weakens further alongside the rest of its risk-linked peers, breaching below the 0.7000 support and exposing extra weakness in the short-term horizon. The Aussie continues to draw underlying support from sticky domestic inflation and a Reserve Bank of Australia (RBA) that is in no rush to soften its hawkish tone. The ongoing geopolitical tensions, however, should keep gains checked for now.
AUD/USD continues to drift lower, this time breaking below the key contention zone at 0.7000, hitting at the same time fresh four-week troughs.
The pair’s steep decline remains at the mercy of US Dollar (USD) dynamics in a context of intense flight-to-safety in response to the US-Israel-Iran crisis and its implications for the energy market.
In a jittery geopolitical backdrop, high beta currencies like the Aussie naturally ease back. For now, though, this feels more like a sentiment-driven pause than a structural shift in the medium-term story.
Australia: slowing, not stalling
The domestic picture still looks like a controlled cooling. February final Purchasing Managers' Index (PMI) readings showed Manufacturing at 51.0 and Services at 52.2, both in expansion territory.
Retail spending remains resilient; the trade surplus widened to A$3.373 billion at the end of 2025, and Gross Domestic Product (GDP) rose 0.4% QoQ in Q3, taking annual growth to 2.1%. That is broadly in line with Reserve Bank of Australia (RBA) projections.
The labour market is softening at the margin, not cracking. Employment Change rose 17.8K in January, and the Unemployment Rate held at 4.1%. Momentum is easing, but there are no signs of stress.
Inflation: the job is not finished
Inflation remains the pressure point. Headline Consumer Price Index (CPI) stayed at 3.8% YoY in January, above consensus, while the Trimmed Mean CPI edged up to 3.4% YoY.
Disinflation is progressing, but slowly. The RBA still sees inflation peaking around Q2 2026 before gradually returning to the midpoint of the 2 to 3% target band by mid-2028.
Credit data reinforce the message. Home Loans rose 10.6% QoQ in Q4 and Investment Lending increased 7.9%. Policy is restrictive, but demand has not rolled over.
China: stable, not spectacular
China is acting more as a floor than a springboard. GDP expanded 4.5% YoY in Q4, while Retail Sales rose 0.9% YoY in December.
Official PMIs slipped into contraction, but Caixin surveys remained in expansion. Larger state-linked sectors look softer; smaller private firms are more resilient.
Inflation is subdued, with CPI at 0.2% YoY and the Producer Price Index (PPI) down 1.4% YoY. The People’s Bank of China (PBoC) kept the one-year and five-year Loan Prime Rate (LPR) unchanged at 3.00% and 3.50%. Stability, not stimulus.
For the AUD, that means China is no longer a drag but not a powerful tailwind either.
RBA: restrictive and alert
The RBA recently lifted the Official Cash Rate (OCR) to 3.85%, reinforcing that inflation is still the priority.
Governor Michelle Bullock said on Tuesday that markets have remained orderly despite the Middle East conflict. For Australia, the impact is mixed; as a net energy exporter, higher prices can support income, but a prolonged conflict could weigh on consumption.
She stressed that inflation is still elevated and that the Board is firmly focused on inflation expectations. The RBA is working to bring inflation down within a reasonable timeframe and will remain patient as it assesses incoming data. Every meeting is live, and the Board stands ready to move more quickly if needed.
Bullock added that if the labour market stays tight, the unemployment rate may need to rise somewhat to contain inflation. The recent appreciation in the Australian Dollar, she said, reflects interest rate differentials and is not out of the ordinary.
Markets price just over 50 basis points of additional tightening this year. Not aggressive, but enough to maintain a meaningful yield floor under the AUD.
Positioning: conviction, with crowding risk
Commodity Futures Trading Commission (CFTC) data show non-commercial net longs at around 52.6K contracts, a fresh multi-year high. That reflects genuine conviction in the recovery story.
However, open interest dipped to roughly 248.7K contracts, suggesting some of the shift reflects adjustment rather than broad new inflows.
Net longs offer a cushion on dips, but elevated positioning raises the risk of sharper pullbacks if the narrative turns.
What moves AUD/USD next
In the near term, the US Dollar and geopolitics dominate. Strong US data, tariff headlines or further escalation in the Middle East can quickly reshape the pair. In addition, the Fed–RBA spread still offers relative support, but the Aussie remains a high beta play on global sentiment.
Technical scenario
In the daily chart, AUD/USD trades at 0.6951. The near-term bias turns neutral with a downside tilt after the pair slipped from recent highs and stalled below the 23.6% Fibonacci retracement at 0.6976, measured from the 0.6421 low to the 0.7147 high. Price holds above the rising 55-, 100- and 200-day Simple Moving Averages (SMAs), which still outline a broader uptrend, but the Relative Strength Index (RSI) has retreated from overbought territory to 43, showing fading bullish momentum. The Average Directional Index (ADX) has rolled over from above 50 toward the mid-30s, signaling that the prior strong trend is losing strength and favoring consolidation or corrective pressure in the short term.
Immediate resistance emerges at the 23.6% retracement at 0.6976, followed by the horizontal barrier at 0.7158 and then 0.7283. On the downside, initial support aligns at 0.6897, ahead of the 38.2% retracement at 0.6870, where a break would open the way toward 0.6660. Further losses would expose the 0.6593 support level and then 0.6414, the latter converging with the 100% retracement at 0.6421 to create a stronger structural floor if the correction deepens.
(The technical analysis of this story was written with the help of an AI tool.)
Bottom line: constructive, but conditional
Australia’s macro backdrop is resilient, and the RBA remains firmly focused on inflation. That keeps the broader bias tilted higher.
But confidence is conditional. The AUD thrives when risk appetite is healthy. If the US Dollar regains sustained momentum or global sentiment deteriorates, the unwind could be swift.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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Author
Pablo Piovano
FXStreet
Born and bred in Argentina, Pablo has been carrying on with his passion for FX markets and trading since his first college years.
